Although Chinese software outsourcers could be satisfied with their rapid expansion in Japan during the past two years, they must do more as they march into the more demanding European and US markets, where there is no absolute majority of Chinese software manufacturers.
Most executives who attended a recent seminar on China's software outsourcing agree domestic companies should give top priority to moving up the value-chain, by offering more complicated, advanced software services.
"There's an increasing desire for software outsourcing in Western markets, as companies tend to focus on their core competencies," says Bob Hayward, vice-president of Gartner Asia-Pacific and Japan.
"Now, they are moving into the second- and third-generation countries for offshore deals."
It is widely acknowledged that the first-class camp of software industrial competency refers to the US-led Western countries. The second- and third-generation countries mainly include Ireland and India, and China, respectively.
Yet, different from Japanese companies used to outsourcing lower-end services, US-based clients resort to outsourcing for skills, and that requires comprehensive capabilities, in which many Chinese players are not competent enough, notes Joseph Tsu, chief executive officer (CEO) of Symbio (US) Soft Group, which is engaged in software outsourcing.
Domestic outsourcers are mainly responsible for coding and testing when serving Japanese clients. Services up the value-chain, including architect, design and consulting, are usually conducted by Japanese companies.
Meanwhile, "the US market is more demanding in quality than Japan," says Tsu.
That is because 70-80 per cent of US clients are IT (information technology) firms including IBM and Microsoft that serve the numerous end users. Whereas in Japan, most clients are non-IT firms that deploy the outsourced software internally, says Tsu.
William Poon, general manager of Hewlett-Packard's China/Hong Kong operations, tells China Business Weekly the major problem lies in the prevailing IT management deficiency.
"I do not see any technical obstacles in software development ... many Chinese vendors have acquired the CMM5 (certified management model level 5)," he says. "But they lack the experience in handling a comprehensive project that involves higher-level capabilities, such as software architect." CMM5 is the internationally adopted, top-level certification for software project management.
Actually, not only European and US-based companies, but also Japanese firms, are expecting Chinese companies to move up the value-chain, notes Fukui Kazuo, vice-president of Fujitsu Research Institute.
"Japanese firms will gradually transfer the whole package of software outsourcing, covering consulting and daily operations, to their overseas partners," Kazuo says.
To evolve, Chinese outsourcers should take the initiative to reach foreign clients, rather than being "sitting ducks," suggests Martin Tintchev, CEO of AsiaCompete Ltd.
He suggests Chinese outsourcers collaborate with the research and development sites of multinationals in China, or partner in local markets with foreign IT firms. "It is more practical," says Tintchev.
"And to accelerate the expansion process, establish overseas sites and send your engineers there, starting with developing applications at clients' premises."
David Lewis, CEO of IT E-strategies Inc, says Chinese players are supposed to understand the different criteria of European and US-based clients in choosing an outsourcer.
"US solution providers take into account both the technological platform and the verticals," he says.
Independent software developers are always avoided, as they adopt platforms other than those provided by Microsoft, Oracle, IBM and SAP, explains Lewis.
The top five verticals in the US's software outsourcing market are all concerned about management in manufacturing sectors, he says. And Chinese firms that have a physical presence in the United States, such as Objectiva, are often preferred, he adds.
In comparison, chief information officers (CIOs) from Western European companies that have visited China value highly an outsourcer's technological turf. Costs come second.
"Therefore, you should truly know the three technologies that you are best at," says Lewis. But apart from a few opportunities available, chasing the European market is "basically impossible, and thus a waste of time," Lewis says. He explains that Western European companies have a lot of options in conducting outsourcing deals within the EU (European Union), free from tariffs. And labour costs in Eastern Europe are quite competitive.
Apart from the lack of competence in comprehensive project-related capabilities, English-language deficiency, cultural difference, and intellectual property (IP) issue are also major barriers for Chinese companies seeking deals from western markets.
"Think in US ways when doing business with US companies, which differ a lot from Japanese firms in corporate culture," says Chris Chen, CEO of WorkSoft Creative Software Technology Ltd. The firm has provided outsourcing services to European and US companies for a decade.
Direct and open-minded, the US corporate culture may take some time for Asian companies to adapt to, especially when they are used to doing business with partners sharing a similar culture, he says.
Meanwhile, compared with Japanese firms, European and US clients are more concerned about the intellectual property (IP) issue in China, considering the incomplete rules, says Poon.
"But it is encouraging that the government has made a lot of effort to crack down on piracy and to protect intellectual property, through perfecting the legal framework," he says.
In addition, Chinese software companies conduct too few marketing promotions in Western markets, compared with their Indian counterparts, notes Lewis.
"CIOs in major US-based IT companies can easily name the top 10 Indian software companies, and tell you their business focuses, even revenues last year. But when asked about Chinese companies, for most of them it is a blank," he says.
Government, meanwhile, is urged to play a more significant role in promoting China's software outsourcing in Western markets.
"The Chinese Government has already created a favourable environment for the outsourcing ... but the biggest obstacle is the lack of a national body responsible for outsourcing, both within China and externally," Hayward says.
"And that's also how the Indian Government has helped local software companies expand overseas. I do recommend such collaboration in China."
The national body should be in charge of all relevant affairs in software outsourcing, such as marketing, setting standards and professional certification, providing efficient and comprehensive, and providing one-stop services to companies, he explains.
Mohamed Arif Nun, CEO of Multimedia Development Corporation Malaysia, says establishing a marketing and strategic alliance that provides one-stop services is crucial to the development of IT, including the software, industry.
The only government-backed agency for multimedia and information and communication technologies in Malaysia, the corporation has greatly helped local firms develop their competitive incentives, he says.
While top Chinese software companies including Neusoft and DHA have vowed to tap the Western markets, especially the United States, the Chinese Government recently encouraged domestic software outsourcers to diversify their destinations, and to stretch into markets other than Japan.
Statistics released by China's Ministry of Commerce indicate China's software exports reached US$2.8 billion last year. That was 10 times the figure in 1999, when the government issued policies to promote the developing software industry.
Of the total, approximately 60 per cent of the deals are from Japan. The percentage is particularly high 75 per cent in Dalian, a coastal city in northeastern China.
For the remaining share, more than 30 per cent, on average, are conducted domestically, whereas those from Western markets account for about 5 per cent.
Despite the various problems, China, ranked second globally after India, in terms of both business scale and competitiveness in software outsourcing, Western markets are confident about China, as it has strong government support, lower labour costs and a huge talent pool, says Hayward.
"Venture capitalists in the Silicon Valley routinely want new companies in outsourcing, and we know most of that will be emerging in China," says Stephen Pelletier, vice-president of Sun Microsystems. He is responsible for global software engineering.
Many multinationals in China have already started seeking local partners for outsourcing, and many US companies in India have begun coming to China. "'Why should we do our work in India for China? We want that market (China),' they say," Hayward notes.